Valuation of hydrological externalities of land use change:

   Changes in annual water yield and sediment yield due to conversion from forest to pastureland

   89 square kilometers

   upstream: farmers
   downstream: hydroelectricity company

   Modeling of marginal opportunity costs to the electricity producer

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This case study revisits previous work done by Aylward et al. regarding the Rio Chiquito watershed of the Lake Arenal area in Costa Rica, which found that, in the aggregate, livestock production and the higher water yield from pasture would produce greater financial and economic returns than reforestation or natural regeneration. This was because of the relatively high aggregate value of livestock and dairy production, and also the value of the additional water for downstream hydroelectricity. The benefits of the increase in streamflow was found to outweigh the costs of the increase in sediment yield, which was less problematic in part due to the large amount of dead storage space in the reservoir. Sensitivity analysis found that even a strong dry season increase in baseflow under reforestation would be unlikely to reverse this conclusion. Although these conclusions challenge the conventional wisdom, that hydrological externalities provide the basis for financial incentives for reforestation, a disaggregated analysis did show that there were potential incentives for some of the smallholders to switch land uses, and that the greatest amount of water was captured in fragmented cloud forests, also found primarily in the small holdings.